DaVita Inc. 3rd Quarter 2006 Results

EL SEGUNDO, Calif., Nov. 1 /PRNewswire-FirstCall/ -- DaVita Inc. , today announced results for the quarter ended September 30, 2006. Income from continuing operations for the three and nine months ended September 30, 2006 excluding the valuation gain on the Company's Product Supply Agreement with Gambro Renal Products, was $69.9 million and $192.0 million, or $0.66 and $1.82 per share, respectively, as compared with $50.9 million and $151.0 million or $0.49 and $1.45 per share, respectively, for the same periods of 2005. Income from continuing operations for the three and nine months ended September 30, 2006 included incremental after-tax stock-based compensation expense of $4.1 million and $10.1 million or $0.04 and $0.09 per share, respectively, related to SFAS No. 123(R).

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Income from continuing operations for the three and nine months ended September 30, 2006, including the valuation gain on the Product Supply Agreement was $93.1 million and $215.2 million, or $0.88 and $2.04 per share, respectively.

Net income for the three and nine months ended September 30, 2006 including discontinued operations and the valuation gain on the Product Supply Agreement was $94.9 million and $215.6 million, or $0.90 and $2.04 per share, respectively.

Financial and operating highlights include: * Cash Flow: For the rolling 12-months ended September 30, 2006 operating cash flow was $598 million and free cash flow was $488 million, in each case excluding an $85 million income tax payment associated with the divestiture of centers in conjunction with the Gambro Healthcare acquisition. Including these items, operating cash flow for the rolling 12-months was $513 million and free cash flow was $403 million. Operating cash flow for the three months ended September 30, 2006 was $97 million and free cash flow was $67 million. * Operating Income: Operating income for the three months and nine months ended September 30, 2006, excluding the pre-tax valuation gain on the Product Supply Agreement of $38 million, was $179 million and $513 million, respectively. * Volume: Total treatments for the third quarter were 3,668,999 or 46,443 treatments per day, as compared to 3,602,567 or 46,187 treatments per day for the second quarter of 2006. Non-acquired treatment growth in the quarter was 4.2% over the prior year's third quarter. * Center Activity: As of September 30, 2006, we operated or provided administrative services at 1,269 outpatient centers serving approximately 101,000 patients. During the third quarter of 2006, we acquired 5 centers, opened 13 new centers and closed 4 centers. * Effective Tax Rate: The effective annual income tax rate for 2006 is currently expected to be approximately 39.25%. We currently expect the annual effective tax rate for 2007 to be approximately 40%. Outlook

We are revising the lower end of our 2006 operating income projection, therefore our new guidance for operating income is $690-$700 million excluding the valuation gain on the Product Supply Agreement. Our 2007 operating income is currently projected to be in the range of $680-$750 million. These projections and the underlying assumptions involve significant risks and uncertainties, including those described below and actual results may vary significantly from these current projections.

DaVita will be holding a conference call to discuss its results for the third quarter ended September 30, 2006 on November 1, 2006 at 12PM noon Eastern Time. The dial in number is (800)-399-4406. A replay of the conference call will be available on DaVita's official web page, www.davita.com, for the following 30 days.

This release contains forward-looking statements, including statements related to our 2006 and 2007 operating results. Factors which could impact future results include the uncertainties associated with governmental regulations, general economic and other market conditions, accounting estimates and the risk factors set forth in the Company's SEC filings, including its Form 10-Q for the quarter ended June 30, 2006. The forward- looking statements should be considered in light of these risks and uncertainties.

These risks and uncertainties include those relating to: * the concentration of profits generated from commercial payor plans, * possible reductions in private and government payment rates, * changes in pharmaceutical practice patterns, payment policies, or pharmaceutical pricing, * our ability to maintain contracts with physician medical directors, * legal compliance risks, including our continued compliance with complex government regulations and the ongoing review by the U.S. Attorney's Office for the Eastern District of Pennsylvania and the OIG, the subpoena from the U.S. Attorney's Office for the Eastern District of New York, the subpoenas from the U.S. Attorney's Office for the Eastern District of Missouri and DVA Renal Healthcare's (formerly known as Gambro Healthcare, Inc.) compliance with its corporate integrity agreement, * our ability to complete and integrate acquisitions of businesses, and * the successful integration of DVA Renal Healthcare, including its billing and collection operations.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

This release contains non-GAAP financial measures. For reconciliations of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see the attached reconciliation schedules. DAVITA INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) (dollars in thousands, except per share data) Three months ended Nine months ended September 30, September 30, 2006 2005 2006 2005 Net operating revenues $1,237,041 $644,892 $3,608,045 $1,840,603 Operating expenses and charges: Patient care costs 857,049 435,212 2,517,795 1,235,952 General and administrative 113,447 60,820 329,059 174,939 Depreciation and amortization 44,478 25,410 128,086 74,188 Provision for uncollectible accounts 31,985 11,462 93,295 32,751 Minority interests and equity income, net 10,956 6,690 26,857 16,184 Valuation gain on Product Supply Agreement (37,968) -- (37,968) -- Total operating expenses and charges 1,019,947 539,594 3,057,124 1,534,014 Operating income 217,094 105,298 550,921 306,589 Debt expense (67,904) (24,284) (206,799) (66,700) Swap valuation (loss) gain (1,718) 4,543 Refinancing charges (6,872) Other income 3,271 2,059 10,118 5,741 Income from continuing operations before income taxes 152,461 81,355 354,240 243,301 Income tax expense 59,370 30,441 139,040 92,290 Income from continuing operations 93,091 50,914 215,200 151,011 Discontinued operations Income from operations of discontinued operations, net of tax 4,303 13,483 Gain on disposal of discontinued operations, net of tax 1,765 362 Net income $94,856 $55,217 $215,562 $164,494 Earnings per share: Basic earnings per share from continuing operations $0.90 $0.50 $2.08 $1.50 Basic earnings per share $0.91 $0.55 $2.09 $1.64 Diluted earnings per share from continuing operations $0.88 $0.49 $2.04 $1.45 Diluted earnings per share $0.90 $0.53 $2.04 $1.58 Weighted average shares for earnings per share: Basic 103,784,510 101,307,461 103,295,407 100,399,902 Diluted 105,923,976 104,371,789 105,643,406 103,803,975 DAVITA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands) Nine months ended September 30, 2006 2005 Cash flows from operating activities: Net income $215,562 $164,494 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 128,086 77,080 Valuation gain on Product Supply Agreement (37,968) -- Stock-based compensation expense 18,896 2,601 Tax benefits from stock option exercises 29,261 34,420 Excess tax benefits from stock-based compensation (27,146) -- Deferred income taxes 1,249 (8,950) Minority interests in income of consolidated subsidiaries 28,812 18,225 Distributions to minority interests (25,552) (12,261) Equity investment income (1,955) (822) Loss (gain) on disposal of discontinued operations and other dispositions 508 (2,213) Non-cash debt and other expenses 13,562 2,397 Refinancing charges -- 6,872 Swap valuation gain -- (4,543) Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: Accounts receivable (46,135) (31,284) Inventories (29,118) (2,670) Other receivables and other current assets (18,155) (12,699) Other long term assets (5,329) (2,134) Accounts payable 16,557 2,753 Accrued compensation and benefits 67,889 27,366 Other current liabilities 63,643 27,279 Income taxes (65,924) 19,670 Other long-term liabilities 2,720 (3,371) Net cash provided by operating activities 329,463 302,210 Cash flows from investing activities: Additions of property and equipment, net (181,425) (97,529) Acquisitions and purchases of other ownership interests (75,580) (132,440) Proceeds from divestitures and asset sales 21,348 2,327 Investments in and advances to affiliates, net 14,605 14,294 Intangible assets (5,749) (779) Net cash used in investing activities (226,801) (214,127) Cash flows from financing activities: Borrowings 4,493,339 1,742,433 Payments on long-term debt (4,826,163) (1,753,351) Deferred financing costs 296 (30,561) Excess tax benefits from stock-based compensation 27,146 -- Stock option exercises and other share issuances, net 31,187 38,613 Net cash used in financing activities (274,195) (2,866) Net (decrease) increase in cash and cash equivalents (171,533) 85,217 Cash and cash equivalents at beginning of period 431,811 251,979 Cash and cash equivalents at end of period $260,278 $337,196 DAVITA INC. CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in thousands, except per share data) September 30, December 31, 2006 2005 ASSETS Cash and cash equivalents $260,278 $431,811 Accounts receivable, less allowance of $161,361 and $138,598 902,745 853,560 Inventories 99,336 69,130 Other receivables 129,795 116,620 Other current assets 22,232 38,463 Deferred income taxes 198,372 144,824 Total current assets 1,612,758 1,654,408 Property and equipment, net 813,055 750,078 Amortizable intangibles, net 214,494 235,944 Investments in third-party dialysis businesses 2,179 3,181 Other long-term assets 44,289 41,768 Goodwill 3,657,355 3,594,383 $6,344,130 $6,279,762 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $227,650 $212,049 Other liabilities 448,021 381,964 Accrued compensation and benefits 302,011 231,994 Current portion of long-term debt 6,640 71,767 Income taxes payable 26,035 91,959 Total current liabilities 1,010,357 989,733 Long-term debt 3,818,111 4,085,435 Other long-term liabilities 27,650 26,416 Alliance and product supply agreement and other intangibles, net 108,270 163,431 Deferred income taxes 121,208 75,499 Minority interests 111,722 88,639 Commitments and contingencies Shareholders' equity: Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) Common stock ($0.001 par value, 195,000,000 shares authorized; 134,862,283 shares issued) 135 135 Additional paid-in capital 615,939 569,751 Retained earnings 1,055,492 839,930 Treasury stock, at cost (30,909,676 and 32,927,026 shares) (538,845) (574,013) Accumulated other comprehensive income 14,091 14,806 Total shareholders' equity 1,146,812 850,609 $6,344,130 $6,279,762 DAVITA INC. SUPPLEMENTAL FINANCIAL DATA (unaudited) (dollars in millions, except for per share and per treatment data) Q3 2006 Q2 2006 Q3 2005 Nine months ended September 30, 2006 Financial Results excluding the valuation gain on the Product Supply Agreement for the quarter and the nine months ended September 30, 2006: Income from continuing operations (1) $69.9 $64.3 $50.9 $192.0 Net income (1) $71.7 $63.2 $55.2 $192.4 Diluted earnings per share from continuing operations $0.66 $0.61 $0.49 $1.82 Diluted earnings per share $0.68 $0.60 $0.53 $1.82 Operating income (1) $179.1 $171.8 $105.3 $513.0 Operating income margin 14.5% 14.2% 16.3% 14.2% Other comprehensive income Unrealized (loss) gain on securities, net of tax (expense) benefit of $6.6, ($2.2), ($7.9) and $.5 ($10.3) $3.4 $12.3 ($.7) Business Metrics: Volume Treatments 3,668,999 3,602,567 1,928,684 10,772,598 Number of treatment days 79.0 78.0 79.0 234.0 Treatments per day 46,443 46,187 24,414 46,037 Per day year-over-year increase 90.2% 94.0% 13.4% 94.2% Non-acquired growth year-over-year 4.2% 4.1% 5.2% 4.4% Revenue Total operating revenue $1,237 $1,208 $645 $3,608 Dialysis revenue per treatment $320.90 $318.80 $317.03 $318.83 Per treatment increase from previous quarter 0.66% 0.66% 1.1% -- Per treatment increase from previous year 1.2% 1.7% 0.68% 1.4% Expenses A. Patient care costs Percent of revenue 69.3% 69.8% 67.6% 69.8% Per treatment $233.59 $233.99 $225.65 $233.72 Per treatment (decrease) increase from previous quarter (0.17%) 0.18% 1.4% -- Per treatment increase from previous year 3.5% 5.1% 2.2% 4.9% B. General & administrative expenses Percent of revenue 9.2% 9.2% 9.4% 9.1% Per treatment $30.92 $30.93 $31.53 $30.55 Per treatment (decrease) increase from previous quarter (0.03%) 4.0% (2.2%) -- Per treatment (decrease) increase from previous year (1.9%) (4.1%) 5.9% (3.1%) C. Bad debt expense as a percent of current-period revenue 2.6% 2.6% 1.8% 2.6% D. Consolidated effective tax rate from continuing operations 38.9% 39.5% 37.5% 39.3% (1) These are non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP, see attached reconciliation schedules. DAVITA INC. SUPPLEMENTAL FINANCIAL DATA-continued (unaudited) (dollars in millions, except for per share and per treatment data) Q3 2006 Q2 2006 Q3 2005 Nine months ended September 30, 2006 Cash Flow Operating cash flow $96.9 $256.1 $84.6 $329.5 Operating cash flow, excluding the income tax payment on divested centers $96.9 $256.1 $84.6 $414.8 Operating cash flow last twelve months $512.8 $500.5 $389.6 -- Operating cash flow, excluding the income tax payment on divested centers last twelve months $598.1 $585.8 $389.6 -- Free cash flow $67.4 $227.5 $75.0 $251.5 Free cash flow, excluding the income tax payment on divested centers $67.4 $227.5 $75.0 $336.9 Free cash flow last twelve months $403.2 $410.7 $342.8 -- Free cash flow, excluding the income tax payment on divested centers last twelve months $488.5 $496.1 $342.8 -- Capital expenditures: Development and relocations $35.1 $37.3 $24.9 $98.7 Routine maintenance/ IT/other $31.5 $30.1 $11.4 $83.3 Acquisition expenditures $6.0 $46.7 $48.5 $75.6 Accounts Receivable Net receivables $903 $859 $493 DSO 70 67 70 Debt/Capital Structure Total debt $3,825 $3,944 $1,365 Net debt, net of cash $3,564 $3,605 $1,028 Leverage ratio (see Note 1) 3.96x 4.07x -- Clinical (quarterly averages) Dialysis adequacy - % of patients with Kt/V > 1.2 93% 93% 94% Patients with albumin > /= 3.5 - 84% 83.7% 83.5% 82.9% DAVITA INC. SUPPLEMENTAL FINANCIAL DATA-continued (unaudited) (dollars in thousands) Note 1: Calculation of the Leverage Ratio

Under the Company's current credit agreement (Credit Agreement), the leverage ratio is defined as all funded debt plus the face amount of all letters of credit issued, minus cash and cash equivalents, divided by "Consolidated EBITDA". The leverage ratio determines the interest rate margin payable by the Company under the Credit Agreement by establishing the margin over the base interest rate (LIBOR) that is applicable. The following leverage ratio was calculated using "Consolidated EBITDA" as defined in the Credit Agreement. The calculation below is based on the last twelve-months of Consolidated "EBITDA", pro forma for the routine acquisitions that occurred during the period. The Company's management believes that the presentation of "Consolidated EBITDA" is useful to investors to enhance their understanding of the Company's leverage ratio under its Credit Agreement.

Rolling 12-months ended September 30, 2006 Income from continuing operations $271,611 Income taxes 170,425 Debt expense 279,685 Depreciation and amortization 170,734 Minority interests and equity income, net 32,762 Valuation gain on Product Supply Agreement (37,968) Swap valuation gain (5) Refinancing charges 1,298 Other 5,060 Stock-based compensation expense 18,896 "Consolidated EBITDA" $912,498 September 30, 2006 Total debt $3,824,751 Letters of credit issued 49,353 3,874,104 Less: cash and cash equivalents (260,278) Consolidated net debt $3,613,826 Last twelve months "Consolidated EBITDA" $912,498 Leverage ratio 3.96x

In accordance with the Company's Credit Agreement, the Company's leverage ratio can not exceed 6.0 to 1.0 as of September 30, 2006. At that date, the Company's leverage ratio did not exceed 6.0 to 1.0.

DAVITA INC. RECONCILIATIONS FOR NON-GAAP MEASURES (unaudited) (dollars in thousands) 1. Income from continuing operations and net income excluding the valuation gain on the Product Supply Agreement: We believe that income from continuing operations and net income excluding the valuation gain on the Product Supply Agreement enhances a user's understanding of our normal income from continuing operations and net income for these periods by providing a measure that is more meaningful because it excludes a non-recurring non-cash item that resulted from an amendment of the Product Supply Agreement and accordingly is more comparable to prior periods and indicative of consistent income from continuing operations and net income. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to income from continuing operations and net income. Q3 2006 Q2 2006 Q3 2005 Nine months ended September 30, 2006 Income from continuing operations $93,091 $64,329 $50,914 $ 215,200 Less: Valuation gain (37,968) -- -- (37,968) Add: Related income tax 14,770 -- -- 14,770 $69,893 $64,329 $50,914 $ 192,002 Net income $94,856 $63,237 $55,217 $ 215,562 Less: Valuation gain (37,968) -- -- (37,968) Add: Related income tax 14,770 -- -- 14,770 $71,658 $63,237 $55,217 $ 192,364 2. Operating income excluding the pre-tax valuation gain on the Product Supply Agreement: We believe that operating income excluding the valuation gain on the Product Supply Agreement enhances a user's understanding of our normal operating income for these periods by providing a measure that is more meaningful because it excludes a non-recurring non-cash item that resulted from an amendment of the Product Supply Agreement and accordingly is more comparable to prior periods and indicative of consistent operating income items. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to operating income. Q3 2006 Q2 2006 Q3 2005 Nine months ended September 30, 2006 Operating income $217,094 $171,752 $105,298 $550,921 Less: Valuation gain (37,968) -- -- (37,968) $179,126 $171,752 $105,298 $512,953 RECONCILIATIONS FOR NON-GAAP MEASURES (unaudited) (dollars in thousands) 3. Operating cash flow, excluding the income tax payment on divested centers: We believe that operating cash flow excluding the income tax payment on divested centers enhances a user's understanding of our normal operating cash flows for these periods by providing a measure that is more meaningful because it excludes non-recurring transactions that can cause unusual fluctuations in our operating cash flows and accordingly is more comparable to prior periods and indicative of consistent operating cash flow items. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to cash flows from operating, investing or financing activities, as an indicator of cash flows or as a measure of liquidity. Nine months ended September 30, Q3 2006 Q2 2006 2006 Q3 2005 Cash provided by operating activities $96,937 $256,090 $329,463 $84,609 Income tax payment on divested centers -- -- 85,328 -- $96,937 $256,090 $414,791 $84,609 Rolling 12-Month Period Q3 2006 Q2 2006 Q3 2005 Cash provided by operating activities $512,807 $500,479 $389,551 Income tax payment on divested centers 85,328 85,328 -- $598,135 $585,807 $ 389,551 RECONCILIATIONS FOR NON-GAAP MEASURES (unaudited) (dollars in thousands) 4. Free cash flow and free cash flow, excluding the income tax payment on divested centers: Free cash flow represents net cash provided by operating activities less expenditures for routine maintenance and information technology. We believe free cash flow is a useful adjunct to cash flow from operating activities and other measurements under United States generally accepted accounting principles, since it is a meaningful measure of our ability to fund acquisition and development activities and meet our debt service requirements. Free cash flow is not a measure of financial performance under United States generally accepted accounting principles and should not b

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